Liquidation FAQs

Liquidation Frequently Asked Questions (FAQs)

What should a director do upon becoming aware that a company is insolvent?
A director has a fiduciary duty to act in the best interests of the company at all times. If a director identifies that the company is insolvent and does not take proactive steps to ensure that the company does not incur any further debts, when there is little or no prospect that these debts will be paid, then a director may become personally liable for the damage caused to the company as a result of insolvent trading.

A director should seek advice from a qualified insolvency practitioner as soon as he or she becomes aware that the company may be trading whilst insolvent.

If you are concerned that your company may be trading whilst insolvent you should contact Pearce & Heers’ Brisbane or Gold Coast Offices to discuss the options available to you.

How is a company placed into liquidation?

The shareholders of a company can resolve to appoint a liquidator to the company, often by signing a Resolution for the liquidator’s appointment. In most circumstances this can be done in a prompt and timely manner.

A creditor who is owed over $2,000 (and certain other parties) can apply to Court to have a liquidator appointed to a company.

What is the cost of putting a company into liquidation?

If a company has available assets of a sufficient value to cover some or all of the costs of liquidation, then it is likely that there will be no up front costs to the directors or shareholders to appoint a liquidator to the company.

If a company has little or no assets, then a liquidator will generally seek that funds be made available to pay his or her costs of acting as liquidator of the company.

What is voluntary administration?
Voluntary administration is an alternative to the liquidation of a company, which may provide the company with an opportunity to compromise its debts and continue trading.
What is the effect of liquidation?
If a company is placed in liquidation, then an independent person (the liquidator) is appointed to the company. The tasks which a liquidator will perform include:
  • Taking control of the company’s assets.
  • Examining the events and circumstances preceding the winding up of the company.
  • Examining the company’s financial position in order to determine whether the company traded whilst insolvent.
  • Reporting to creditors regarding the results of the liquidator’s investigations and the prospect of a dividend being paid to creditors in the liquidation.
  • Providing for a fair and equitable distribution of the company’s property between creditors.

What are the benefits of appointing a liquidator to a company?
There are a number of benefits of appointing a liquidator to a company, including:
  • It is a way in which a director can avoid personal liability under a Director Penalty Notice issued by the ATO.
  • It may limit or reduce the company’s directors’ liability for insolvent trading.
  • It may limit or reduce the company’s directors’ liability for certain offences under the Corporations Act 2001.
  • It results in an independent person being appointed to the company, who will conduct an orderly winding up of the company’s affairs.
  • It avoids the company being placed in liquidation by the ATO or another creditor.

What are the responsibilities of a director of a company placed in liquidation?
A company’s director has a duty to assist the liquidator during the liquidation process. A company‘s director must also complete a Report as to Affairs form (setting out the company’s assets and creditors) and promptly provide the liquidator with all of the books and records of the company.
What is insolvent trading?
Insolvent trading, is the continued trading of a company which is unable to pay its due and payable debts. If a company is traded whilst it is insolvent then the company’s directors can be liable for insolvent trading if the company is placed in liquidation and the liquidator pursues legal action against the directors.

The amount of a director’s liability for insolvent trading (if a claim is pursued by a liquidator) will be the total amount of the company’s unpaid debts which were incurred during the period of the company’s insolvency.

What is a Director Penalty Notice?

The ATO can issue a Director Penalty Notice to a company’s director, which can make the director liable for the company’s unpaid PAYG Tax. The director will be liable for the company’s unpaid PAYG Tax unless one of the following occurs within 21 days from the date of the Notice:
  • The company pays the tax.
  • A voluntary administrator is appointed to the company.
  • The company is placed in liquidation.

Is a company’s director liable for the company’s debts?
A company’s director is generally not liable for a company’s debts, subject to certain exceptions, including:
  • Debts which the director has personally guaranteed.
  • The director’s liability to the ATO under a Director Penalty Notice which expired prior to the appointment of a liquidator or voluntary administrator to the company.
  • The director’s liability for insolvent trading.
  • Certain personal liabilities to the QBSA (Queensland Building Services Authority), or under a Deed of Covenant & Assurance executed at the request of the QBSA.

If a company is placed in liquidation is the director excluded from managing other companies?
A director of a company which is placed in liquidation, who has not been the director of any other companies which have been wound up in insolvency in the last seven years, will generally (subject to certain exceptions), not be disqualified from being a director of further companies.

However, it is common for the ASIC to seek to disqualify a person from acting as a director for up to five years, if that person has been the director of two or more companies which have been placed in insolvent liquidation in the last seven years.

This does not apply to directors of companies which have been wound up by way of a (solvent) Members Voluntary Liquidation.

If you require further information regarding these alternatives to liquidation, you should contact our Brisbane or Gold Coast office and our experienced staff will be able to assist you.